Windsor Industries purchased the following assets and constructed a building as well. All this was done during the current year. Assets 1 and 2: These assets were purchased as a lump sum for $210,000 cash. The following information was gathered. Description Initial Cost on Sellers Books Depreciation to Date on Sellers Books Book Value on Sellers Books Appraised Value Machinery $210,000 $105,000 $105,000 $189,000 Equipment 126,000 21,000 105,000 63,000 Asset 3: This machine was acquired by making a $21,000 down payment and issuing a $63,000, 2-year, zero-interest-bearing note. The note is to be paid off in two $31,500 installments made at the end of the first and second years. It was estimated that the asset could have been purchased outright for $75,390. Asset 4: This machinery was acquired by trading in used machinery. (The exchange lacks commercial substance.) Facts concerning the trade-in are as follows. Cost of machinery traded $210,000 Accumulated depreciation to date of sale 84,000 Fair value of machinery traded 168,000 Cash received 21,000 Fair value of machinery acquired.

I have a question about asset 4. My instructor taught me that when I have to find portion of gain, the formula is cash received( boot)/(boot)+ FVof assets received)* total gain. The answer for this question was (21,000/147,000)* 42,000= 6,000. I don't understand why. Also, what is the difference between " fair value of machine traded' and "fair value of machinery acquired." Please help me. thanks!